Question

Epsilon Co. can produce a unit of product for the following costs:Direct material $7.70Direct labor 23.70Overhead 38.50Total costs per unit $69.90An outside supplier offers to provide Epsilon with all the units it needs at $62.35 per unit. If Epsilon buys from the supplier, the company will still incur 30% of its overhead. Epsilon should choose to:Make since the relevant cost to make it is $58.35.Buy since the relevant cost to make it is $69.90.Buy since the relevant cost to make it is $42.95.Make since the relevant cost to make it is $43.Buy since the relevant cost to make it is $58.

Answer 1

Answer:

Make since the relevant cost to make it is $58.35

Explanation:

$\left[\begin{array}{cccc}& produce& buy& Differential\\ Purchase&-&-62.35&-62.35\\ Manufacturing Cost&-58.35&-&58.35\\ Allocate Cost&-11.55&-11.55&-\\ Total Cost&-69.9&-73.9&-4\\\end{array}\right]$

The manufacturing cost will be:

direct material 7.70

direct labor    23.70

Overhead 38.5 x 70% = 26.95

Total manufacturing cost 58.35

Allocated cost 11.55

The purchase cost is higher than our manufacturing cost of 58.35

It is better to make the unit.

The purchase option generates a differential loss for $4